Euro-Area March Inflation Slows Less Than Estimated

The ECB probably will maintain its benchmark rate at a record low 0.75 percent at tomorrow’s meeting in Frankfurt, according to the median of 56 economist estimates in a Bloomberg survey. Photographer: Ralph Orlowski/Bloomberg

April 3 (Bloomberg) -- Euro-area inflation slowed less than
economists forecast in March as steeper price increases for
services offset an easing in energy costs.

Annual price growth in the 17-nation economy was 1.7
percent, down from 1.8 percent in February, the European Union’s
statistics office in Luxembourg said today. That compares with
the 1.6 percent median of 44 economists’ estimates in a
Bloomberg News survey. The inflation rate moved below the
European Central Bank’s 2 percent ceiling in February for the
first time in more than two years.

The ECB’s Governing Council meets tomorrow to decide on
interest rates after a month in which euro-area leaders fumbled
a bailout of Cyprus and the euro fell to its lowest level of the
year against the dollar. ECB President Mario Draghi said on
March 7 that underlying price pressures remain contained, with
an average inflation rate of about 1.6 percent forecast for this
year given the weak economy.

“On paper, you could say there’s room for an interest-rate
cut,” said Thilo Heidrich, an economist at Deutsche Postbank AG
in Bonn. “On the other hand, you could say that would achieve
nothing and would only use up some ammunition in case the debt
crisis really worsens.”

Rate Decision

The ECB probably will maintain its benchmark rate at a
record low 0.75 percent at tomorrow’s meeting in Frankfurt,
according to the median of 56 economist estimates in a Bloomberg
survey. The central bank has held its key rate at that level
since July and just two of the economists polled forecast a cut
this time.

Energy prices increased an annual 1.7 percent in March
after a 3.9 percent gain a month earlier, today’s report showed.
Prices of food, alcohol and tobacco rose 2.7 percent, the same
as in February, while the cost of services increased 1.9 percent
after a 1.5 percent gain in the prior month.

In the U.K., the British Retail Consortium said its measure
of shop-price inflation accelerated to 1.4 percent in March. It
also said the impact of the pound’s weakness is beginning to be
felt on import prices.

Separately, U.K. construction contracted for a fifth month
in March as the industry suffered from bad weather and poor
demand, Markit Economics said. An index of activity was at 47.2
in March compared with 46.8 in February, missing the median
economist forecast of 48.

Mortgage Supply

The Bank of England said in a survey today that lenders
increased the availability of mortgages in the first quarter and
expect a further improvement this quarter. BOE policy makers,
who are trying to encourage banks to increase lending, begin
their monthly two-day meeting today and will keep their bond-purchase goal unchanged, according to the median of 37
economists in a Bloomberg survey. Three economists predict a 25
billion-pound increase.

The sovereign-debt crisis flared up again last month after
euro-area finance ministers decided to impose losses on
depositors at Cypriot banks in exchange for a 10 billion-euro
($12.8 billion) aid package. Michael Sarris yesterday resigned
as Cyprus’s finance chief after helping clinch the final terms
of the bailout, which includes the imposition of losses on
uninsured depositors at the nation’s two biggest banks.

The euro was unchanged against the U.S. dollar, trading at
$1.2820 at 12:45 p.m. in Brussels, after being down as much as
0.2 percent earlier. The pound was little changed against the
euro and the dollar, after falling earlier to a two-week low
against the dollar.

Cyprus Bailout

Concerns about the bailout for Cyprus last week had helped
push the euro below $1.28 for the first time in four months. The
single currency traded as low as $1.2751 on March 27, the lowest
since Nov. 21, before rebounding. The euro had weakened in the
past two days amid speculation that the ECB will use its meeting
tomorrow to signal the likelihood of future economic stimulus.

The central bank cut its economic outlook last month,
predicting a contraction of 0.5 percent for the euro area this
year and growth of 1 percent in 2014. Draghi repeated the
scenario that growth would eventually return to Europe’s economy
in the second half of this year.

Still, hard evidence that a recovery is building is scarce.
Euro-area services and manufacturing output contracted the most
in four months in March and a gauge of economic confidence
decreased more than economists forecast. Unemployment rose to an
all-time high of 12 percent in February, with a record 19.1
million people out of work, up 33,000 from the prior month.

Euro-Area Recession

As Europe struggles to emerge from the recession,
manufacturers are relying on faster-growing markets to maintain
revenues. Schaeffler AG, the industrial-bearing maker that is
the biggest investor in car-parts producer Continental AG, said
on March 21 that demand in North America and Asia will more than
make up for a drop in Europe to allow sales growth in 2013.

The euro-zone economy has contracted for five straight
quarters and that trend is forecast to continue in the first
three months of this year, according to a separate Bloomberg
survey of economists. The ECB’s Draghi may face more pressure to
act to foster a recovery, said Christian Schulz, senior European
economist at Berenberg Bank in London.

“The euro-zone economic confidence recovery has stalled,
renewed financial-market tensions are, and will be, a drag,”
Schulz said. “The delayed recovery means that a rate hike is
unlikely before the second quarter of 2014.”